Notes From Underground: The San Francisco Fed Says It Ain’t Rocket Science … Again

The talking heads in the financial media have a great deal to answer in regards to yesterday’s release of the San Francisco Fed’s Economic Letter by Rudebusch, Wilson and Mahedy in which the three researchers said: “We find that a second round of seasonal adjustment implies that real GDP growth so far this year appears to have been substantially stronger than the BEA [Bureau of Economic Analysis] initially reported.”

The purpose of their research is to remove the “wild seasonal swings” between the first and second quarters of the years as they noted that the first quarter dropped “… about 10% at an annual rate every first quarter and rose about 20% every second quarter.” The short FRBSF shows that using the newer methodology of the “double seasonal adjustment can be used to gauge how much first-quarter GDP growth has been affected by residual seasonality.” The new and improved methodology results in a GDP number for the first quarter of 1.8% versus the reported BEA number of 0.2%.

Last week I wrote that I believed that the FOMC was seeking to raise INTEREST RATES faster than the pundits believe based on the DEPENDENT DATA. In fact, SAN FRANCISCO FED PRESIDENT John Williams presented Steve Liesman with a t-shirt that advertised the view, data dependent. It seems that what the San Francisco Fed should be distributing is a t-shirt I used to wear: “When In Doubt, Manipulate the Data.”

Zero Hedge captured the insanity of the FRBSF letter very well and it plays upon my opinion of last week. The FED wants to raise rates so to test its normalization tools, the O/N RPP-IOER corridor as a way to drain reserves from the financial system. The ZERO rate seems to be a problem for Simon Potter and the System Open Market Account. Again, if the FRBSF can manipulate the data to create the illusion of greater growth in an effort to give the FED cover for raising rates IT AIN’T ROCKET SCIENCE.

Zero Hedge also points out that the Atlanta Fed’s GDP NOW forecast had the first quarter GDP number PEGGED and it is NOW projecting second quarter GDP growth of 0.7%. It seems that the FED is going to have to move fast to stay ahead of the slowing data if it wants to RAISE RATES IN AN EFFORT TO REMOVE EXCESS RESERVES FROM THE SYSTEM.

If my THEORY is correct it should lead to a nice risk/reward play in the September FED FUNDS contract, which is currently trading at 0.9982, reflecting an effective yield of 18 BASIS POINTS.It may well be a return of 6-1 if I am correct. I am putting on a small position to test the theory but the bigger moves may come in the DOLLAR, commodities and precious metals.

Any hint of a FED on the move to raise rates will TEMPORARILY push the dollar higher and the other assets lower, but the operative concept will be: For how long? If the FED is one and done the market will not keep the DOLLAR HIGHER AND METALS LOWER FOR LONG.Remember, this will be a TEST. Remember, last week Janet Yellen noted that equity valuations were extended. On with the high-level math of rocket science or the scientific envy of IVY LEAGUE ECONOMISTS.

It seems to me that a rate hike at the June FOMC is not out of the question and it will likely generate a “taper tantrum” reaction if there is any kind of a hike. With the indexes at all time highs (if they are still there by then) a short would have a great R/R imo.

Yra,
Excellent deduction. Now that we live in the world of”forward guidance”, we obviously deserve double secret probation. I agree with a surprise rate hike, given the clues laid out by Dean Wormer. Animal House, you’ve been warned!